'By virtue of exchange, one man's prosperity is beneficial to all others.' – Frédéric Bastiat

Minimum Wage, Minimal Effect

The minimum wage is a classic wedge issue in political discourse and both sides of the argument represent wider philosophical camps. Proponents claim the policy helps exploited members of the working poor and promotes economic equality. Opponents criticize, however, criticize the minimum wage for hampering voluntary exchange and decreasing employment and competitiveness.

Those who value economic equality and fairness should back away from this current discourse and ask whether a minimum wage actually advances their objectives. In practice, minimum wages poorly targets those it aims to help and has a number of adverse unintended consequences.

The most common criticism of minimum wage laws goes as follows: according to the law of demand, increasing the price of something decreases how much it people choose to consume. When the cost of low-wage labour increases, therefore, firms respond by scaling back their use of said labour through lay-offs or cutting hours. Research conducted by Canadian academics supports this assertion.

Supposing, for a moment, that minimum wage does not increase unemployment in the short-term, it is, in any case, likely to increase unemployment in the long-term. Because employers have invested in employee training costs and because there are costs associated with relieving employees (i.e. severance), for instance, businesses are less likely to cut jobs the day a minimum wage increase is legislated.

If firms are compelled to pay their workers more, they will use more effective means of production as substitutes for domestic labour. Using these substitutes–like automation and outsourcing–means that companies employ less labour.

A decrease in employment, however, is not the only possible outcome. The concept of compensating differentials, for instance, posits that wages are not the only compensation workers receive or, in the very least, consider. Rather, workers may be happier with a lower salary in exchange for something else, such as benefits or a safer work environment.

Faced with higher mandatory wages, firms may be compelled to curb other labour costs. For instance, they could remove training opportunities, stop providing compulsory uniforms, or make the workplace less comfortable by, for example, paying less for utilities like heating and air conditioning.

Let us imagine that increasing the minimum wage boosts the income of those fortunate enough to earn a wage at all. Does the mandatory wage increase help low-income households?

Unlikely. Looking at the profile of Canadian minimum-wage earners, roughly 6% of employed Canadians (most of which are students) live with their families, about 60% work part-time, and half leave their job within a year. These employees, in other words, are largely dependents working temporary jobs and not the working poor who policymakers attempt to target with minimum wage legislation.

If boosting the salaries of the working poor is the objective, looking at policies that address severe underemployment–policies that, for instance, provide basic minimum incomes or increase access to education–is a much more suitable measure. The minimum wage, however, is a distraction disguised as a panacea. Unfortunately, increasing it does little but harm to those it seeks to help.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute